The Financial Times summed up the mood nicely in a headline on its website on the weekend: “Gloom envelops world markets.” And there’s more to come, despite the BHP Billiton stalking of Rio Tinto. A cascade of bad news on Friday from some of America’s biggest banks about new and growing subprime losses, as well as rumours about Barclays Bank of Britain that won’t be silenced, are generating the gloom.

And there’s more to come with figures on inflation in the US, pending new home sales and an earnings report from HSBC, which sparked the disclosure of subprime losses back in March with news of a $US10.8 billion set of provisions and write-downs. Now US and UK analysts are expecting HSBC to provide more detail and more news on its losses midweek.

Friday saw America’s fourth biggest bank, First Wachovia, plus Bank of America and JP Morgan Chase tell the market that they were facing billions of dollars in new losses in the fourth quarter: this was on top of reports last week from Washington Mutual, America’s biggest savings and loan group and Morgan Stanley, that they also faced billions more than forecast or expected in losses from the toxic subprime investments they had made.

Stock markets on both sides of the Atlantic had their worst week last week since the start of the credit crunch in August: falling by 3% and 4%: our market was only less than 2% as the BHP bid for Rio sparked a small rally on Friday that lost steam as the BHP share price took a pounding. That continued in London as a sharp fall in the value of the Australian dollar against sterling, the US dollar and the yen bit, dropping the London prices of both companies sharply.

Despite the cheer squad in Australia in favour of the BHP bid, the market is not happy and suspects the value of the bid at the moment, hence the losses for BHP shares.

The Aussie dollar lost 2 USc in value, a steep fall which hit the value of the BHP bid for Rio Tinto, cutting the Australian dollar value of both companies shares based on their London close. But as analysts point out BHP has to do something with its profits and cash: in two years’ time it won’t have any gearing because it won’t have any debt. But could the bid be derailed by what’s happening overseas?

The US and Europe are gripped by a deepening economic gloom that has raised expectations that the US Federal Reserve will be forced to cut rates again in the face of mounting credit losses. Investors quit shares for oil, gold, US government bonds but not copper, which fell. The yield on the 10 year US Government bond fell to 4.23%, the lowest for more than two years and more than 1% under the peak of 5.32% reached in the first week of June.

Investors also bought yen which rose against most major currencies; the value of high yield currencies like the Aussie and Kiwi dollars fell sharply Friday night. Analysts say the losses keep coming for big and small groups, and there are rumours big banks in Britain and Japan could surprise with huge losses.

Figures in London media at the weekend said that Britain’s big eight banks had shed $A300 billion in market capitalisation in the past year (that’s more than the market cap of CBA, NAB, ANZ, Westpac and St George) because of the subprime woes, and the collapse of Northern Rock bank and its rescue by the Bank of England.

US reports say the turmoil on Friday came from several sources. The most worrying was the emergence of fire sales of mortgage assets from complex debt vehicles (such as conduits and SIVs) after the trustee of a $US 1.5 billion debt deal managed by State Street Global Advisors, started liquidating its portfolio.

These fire sales follow the downgrade of ratings on subprime mortgage linked securities and funding deals. Trustees are reported to have issued default notices for more than 14 collateralised debt obligation deals in recent weeks, representing securities with a face value of more than $US10 billion.

The fear is that these fire sales will see very low market values established, which will in turn force big banks and other investors to make further write-downs in the value of similar securities they are carrying on their balance sheets. It could be a downward spiral of falling values and write-downs feeding off each other.

Outside the US reports about problems at Barclays Bank in the UK and Mizuho Financial Group in Japan centred on claims that they will report losses on subprime-related assets. Barclays denied this strongly and revealed at the weekend it was working with its auditors to produce a convincing set of accounts and financial report. The big Japanese bank though has been reported ready to reveal losses in the next few days, as well as continuing problems from a worsening domestic finance company industry collapse.

Could Rio be a bit cheaper if BHP waits a few months?